I had the opportunity Monday night to hear Secretary of the Navy Ray Mabus talk at the Council on Foreign Relations about the U.S. Navy’s efforts to transform how they use energy and their intention to become a catalyst for changes in overall energy consumption in the U.S. The Navy has laid out some of the most ambitious goals in the nation regarding energy efficiency and alternative energy. These include:

by 2012, creating a “Green Strike Group” composed of nuclear vessels and ships powered by biofuels and deploying that fleet by 2016;

by 2015, reducing petroleum use in its 50,000 commercial vehicle fleet by 50 percent by phasing in hybrid fuel and electric vehicles;

changing the way the Navy and Marine Corps award contracts during the acquisition process to consider the lifetime energy cost of the system

producing at least half the shore-based energy requirements from renewable sources, such as solar, wind and ocean generated by the base; and

by 2020, ensuring at least 50 percent of the Navy’s total energy consumption comes from alternative sources.

Secretary Mabus started off by talking about what motivates the Navy to take energy efficiency so seriously. For every $1 increase in the price of oil the Navy pays an additional $31 million in fuel costs. Ships are most vulnerable when they are refueling and it was during a refueling visit to Yemen that the USS Cole was attacked. One Marine is killed on average for every 50 convoys in Afghanistan. Convoys transporting fuel account for a significant portion of the total supply convoys in Afghanistan.

Much of the discussion focused on the Navy’s efforts to expand the use of bio-fuels. Mabus said the right things about ensuring that organic matter grown for use in bio-fuels should not displace food production, something the EU has become concerned about as it tries to meet its own ambitious targets regarding members’ use of alternative energy. Large Navy purchases and investment in new technologies helped cut the price of bio-fuels 50% last year and they are expected to go down another 50% this year. However, although source diversity may be good from an overall national energy security perspective, it isn’t clear how expanding the use of bio-fuels would improve the security of the fleet or the Marines. Any sort of liquid fuel whether it is derived from oil, algae, or composted unicorn tails needs to be transported to ports where ships will stop to refuel or through the same supply lines as oil based diesel to get to MRAPs that Marines are driving in Afghanistan. Mabus also suggested that nuclear would remain steady as a portion of overall energy consumption by the fleet at about 17%. A new generation of hybrid ships such as the USS Macon Island that can run entirely off an electric motor below certain speeds may have a significant impact on fuel use over the long term.

Although there was a lot of talk about new whiz bang technologies like electrofuels and flexible solar cells what struck me most about the discussion was the Secretary’s ambition to use the Navy’s policies to change how the country consumes energy. He noted that “Although we defend democracy, we are not one ourselves. We can set mandates (on energy use)… We can use technologies in ways that cannot initially be done by the private sector.” The U.S. Government uses about 2% of energy consumed in the U.S. The Department of Defense is responsible for 80% of government consumption and the Navy is responsible for about a third of that. So even though the Navy is only responsible for .5% of U.S. energy consumption, they are still a big enough player to affect investment patterns and prices of different technologies. Secretary Mabus’ statement that “We are going to create a market for alternative fuels,” sounds a lot to me like good old fashioned industrial policy. The kind of thing that the Chinese continue to engage in with their recent announcement of a national five year plan that includes ambitious energy targets and also the kind of thing that is generally frowned upon by free-marketeers in the U.S. In some ways the Department of Defense is one of the last bastions of explicit industrial policy in America. It even has an Assistant Secretary of Defense for Manufacturing and Industrial Base Policy, something you would never see in a civilian agency like the Department of Commerce. It will be interesting to see if the Navy is able to set the agenda for the entire country reforming the way we produce and consume energy. They certainly seem off to a good start.

Postscript: As I am writing this, President Obama has announced in a speech at Georgetown University that he intends for the U.S. to reduce imports of foreign oil by 30% over the next decade. Changing the consumption patterns of a nation is obviously harder than changing the course of a military service but let us hope that the President can lay out the kind of specifics that the U.S. Navy has been discussing for the past few years as it put forth its own vision of a green military force.

The final weeks of 2010 have seen a flood of attention directed towards biofuels. NPR had a three part series highlighting some of the challenges of ethanol including how it raises food prices, although many people would describe U.S. support for ethanol as more about agricultural policy than energy policy. Biofuel company LS9 raised about $30 million in new funding and Pike Research released a report predicting a 20% increase over the next six years in biomass related capital investment, which includes biofuel and energy products.

Probably the most significant announcement however was that the European Commission (EC) is looking at reevaluating the environmental benefits of biofuels over conventional sources of energy for transportation. In a report issued last week the Commission took a close look at what it refers to as the effects of indirect land use change. The basic concept is that as agricultural land in some areas is converted to fuel oriented crops new land will be needed for food production. The clearing of new land has a carbon impact and depending on where the new land comes from, for example if someone cuts down rainforest in Indonesia in order to create new agricultural areas, the negative carbon impact of opening food production in new areas could substantially offset the positive effects of using biodiesel.

The EC adopted two connected goals in 2009 of a 10% share for renewable energy in the transport sector and a 6% reduction in the greenhouse gas intensity of fuels used in transport. This study throws into question the degree to which biofuels should be the renewable energy source of choice to help meet the greenhouse gas reduction goal for the transport sector. Surprisingly, the report makes no mention of third generation biofuels from algae, which are supposed to be able to generate 30 times as much energy per acre as land crops, as a possible way to minimize these land use challenges. Perhaps this will be addressed in the six month impact assessment the EC is planning as a follow on to this study in order to figure out whether it needs to change its renewable energy and fuel quality directives. It will be interesting to see whether this report or any follow on assessments have an impact on how other countries incorporate biofuels into their energy policy planning.